The market sentiment also deteriorated after the Turkish Development Minister Cevdet Yilmaz said on Thursday the government could revise its medium-term economic plan given the risky global environment.
Deputy Prime Minister Ali Babacan said Turkey had been expecting global growth of around 4 percent this year and next, but the risks were on the downside.
Pessimism mounted and the euro fell after German Chancellor Angela Merkel said she still does not think common European bonds were necessary, intensifying concerns that European leaders cannot agree on solving the debt crisis.
"Merkel's statement deteriorated market's sentiment. The index was following mainly European shares. Rising borrowing costs in Europe worsens risk aversion," said Ahmet Gursoy, equity specialist at Is Invest.
"Besides, investors are now worried about the local macroeconomic environment. The sell-off which started after Fitch's statement continued today," he added.
Turkey's main share index closed down 2.88 percent at 49,621.67 points on Thursday, its lowest level of 21 months, underperforming the emerging markets index, which was up 0.23 percent.
Foreign investors led the selling. The banking shares closed 1.93 percent but the most dramatic falls were in the telecom sector, where Turkcell shares dropped 8.3 percent and Turk Telekom shares lost 8.6 percent.
Analysts said both shares had been overvalued and were illiquid, magnifying the price movement when foreigners sold.
Bond yields rose slightly due to tight liquidity conditions.
The yield on Turkey's benchmark bond maturing in July 2013 closed at 10.70 percent on Thursday, up from a previous close of 10.6 percent. The benchmark yield rose as high as 10.73 percent following Fitch's statement on Wednesday.
"The tight liquidity conditions pushed yields up. The Treasury doesn't have debt redemption in December. Under these funding conditions, we could easily see the benchmark yield at 11 percent in January," said a manager of the treasury marketing unit of a bank.
The Turkish central bank didn't hold a repo auction on Thursday while it drained 2 billion lira ($1.07 billion) from markets.
As the liquidity remained tight, primary dealers used repo facility from the central bank to borrow an amount of 9.898 billion lira ($5.28 billion).
The lira closed at 1.8629 against the dollar on the interbank market on Thursday, slightly firmer compared with a previous close of 1.8670.
But in after-hours trade, the currency weakened to 1.8727 versus the greenback after Merkel's comments hit the euro.
"As the central bank didn't open a repo auction, the lira remained steady until the afternoon. Volumes were low due to US holiday. However, after Merkel's statement the lira declined versus the dollar in tandem with the euro's fall. We are still in a very fragile mood," said a forex trader at one bank in Istanbul.
Against a euro-dollar basket the lira traded at 2.1841, a touch weaker than a previous close of 2.1826.